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Jul-16-2018

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Here s why soaring oil prices might not dent your portfolio

Global crude oil prices are soaring. The Brent Crude oil hit a four year high near $80 per barrel in last week of June, extending its recent gains. Prices are up nearly 70% over last one year and such a massive spurt is likely to weigh on domestic stock markets. India imports bulk of its crude oil requirements and the soaring crude oil futures tend to affect investor sentiments. Therefore, rising crude oil prices are normally considered as a negative factor for domestic economy and stock markets and traders resorting to online trading in equities pay a close attention to oil prices. However, if one looks at the recent history, rising oil has not necessarily affected the domestic equities on every spurt. In fact, the local equities managed to rise in tandem with crude oil prices in 2004-2008 period. Even the record high run to $150 levels in oil did not deter the buying in local stocks much back then. What does it mean and how does online share market investing tend to get affected due to spurt in crude prices? More importantly, with oil prices on the move up yet again, will the local market correct further?

Latest trends show local stocks comfortable with soaring oil

Domestic equities eased in last few months after hitting record highs at the start of the year. It is worth noting that oil prices have gone up in last few months, thereby triggering a negative influence on the local stocks. However, the NIFTY seemed comfortable with rising oil prices in last year. The headline index added nearly 30% even as Brent Crude oil jumped 20% in calendar year 2017. Domestic markets showed signs of fragility only when oil broke above $60 per barrel mark earlier this month. However, after testing near six month low around 9950 in March 2018, the NIFTY managed to gain even as oil prices extended their gains. In June quarter, Nifty edged up 6% even as oil spurted nearly 15%. Oil’s threatening jump towards $80 has not led to an outright collapse in local indices.

Which companies tend to benefit when oil spurts?

It is clear investors need not enter in a panic mode over oil as judging by the historical trends, the market has battled successfully even bigger threats posed by oil prices. In fact, soaring oil prices are supportive for a number of domestic companies. The direct impact is on oil producers and refiners as rising prices increase their operating margins. Rising crude oil prices also reflect strength in global economy, which in turn suggests good prospects for domestic export oriented businesses. If the advanced economies are doing well, that also brightens prospects for domestic IT firms. The interest in alternative energy also tends to pick up on soaring oil prices. Around 4.32 lakh people were employed in the renewable energy sector in India in 2017, according to the inter-governmental International Renewable Energy Agency (IRENA). It indicates that there is likely to continued expansion in this space and companies in green energy sector should be benefitting as a result.

Oil is an asset class like emerging equities

Another critical factor is the relationship between crude oil and other emerging market equities. When oil prices tend to swing higher, that normally reflects a surge in risk appetite or increased fund buying in risky financial assets. Risk assets including oil, commodities and emerging markets all move together. This tends to benefit the share markets in emerging nations and since India is a prominent emerging economy, growing at impressive pace, local shares tend to lift higher along with crude oil. This factor has been at work throughout the last one decade.

Concluding remarks…

In short, rising oil need not spell an outright doom for local equities. Online trading in markets throws open many opportunities almost every time and investors need to make sense of the market dynamics in a sensible and calibrated manner to ensure steady wealth creation over a longer term. More importantly, oil cartel OPEC has already showed willingness to increase their crude oil output in last week of June and there is a possibility that oil may reverse some of the recent gains. All in all, investors need to take cognizance of these facts and approach the markets in an alert and informed manner by understanding the real connection between oil prices and domestic stocks.

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